Everything You Need to Know About Cash-Out Refinancing in Florida Roger Odoardi Whether you’re looking to pay off student loan debt, install a brand-new pool or add to your investment portfolio, cash-out refinancing is a rewarding choice for Florida homeowners. Cash-out refinancing transfers your home equity into cash and makes it possible to accomplish your financial goals. The process opens up a world of opportunity for homeowners, but there are several details to understand first. How Cash-Out Refinancing Works Is Cash-Out Refinancing Right for You? Cash-Out Refinancing Recap How Cash-Out Refinancing Works Cash-out refinancing is a way to leverage the equity you have in your home. You replace your existing mortgage with one that is of higher value and receive a certain percentage of your home equity in cash. Here’s an example: Let’s say you have a home in a suburb of Orlando that is valued at $325,000. You’ve lived there for a while and have decided that now is the right time to finally work on those home improvements you’ve been thinking about for the past few years. You currently owe $250,000 on your mortgage, which means you have $75,000 in equity. Most lenders will allow you to cash out up to 80% of your home value, which is $60,000 in this example. This is perfect because the home renovations you have in mind will only cost about $30,000. Through cash-out refinancing, your new mortgage will include the $250,000 you still owe on your home, plus the money you need for improvements. Since you will need to pay closing costs on this new loan, let’s increase your cash-out amount to $40,000, making your new loan total $290,000. There are no restrictions to how you can use the cash you receive from your equity. Some popular reasons for cash-out refinancing are: Consolidating debt Purchasing a second home or a new car Making home upgrades or renovations Increasing your investment portfolio Adding money to your retirement account Starting a college fund A Note About Interest Rates Cash-out refinancing carries more risk than other options because it involves pulling out your existing equity. To compensate for this risk, borrowers may see higher rates with cash-out refinancing compared to other options, such as rate-and-term refinancing. However, it’s still entirely possible to receive a lower interest rate, especially if you bought your home when rates were high. Qualifying for Cash-Out Refinancing Like any type of loan, there are specific requirements homeowners must meet to be eligible for cash-out refinancing. Perhaps the most important is your home equity. In order to take advantage of a cash-out, you need to already have a sufficient amount of equity in your home. Lenders typically cap the cash-out amount to 80% of your home value, so you will still be left with 20%. If you want to use your equity to pay off $35,000 in debt, but you only have $40,000 in equity, you will need to consider other loan options. With VA loans, borrowers are able to cash out as much as 100% of the value of the home, although anything over 90% is not recommended. On the topic of debt, your debt-to-income (DTI) ratio will also be a factor in whether cash-out refinancing is the right choice for you. You can determine your DTI ratio by dividing your monthly debt payments — such as car payments, mortgage, credit card bills, etc. — by your monthly income. Lenders typically want to see a DTI ratio under 50% for cash-out refinancing. You also need to check your credit score. In most refinancing scenarios, a score of at least 580 is required, but cash-out refinancing could require a score of a least 620. If your score falls under 620, you may want to consider your FHA cash-out refinancing options. Choosing a Cash-Out Refinancing Option There are a few different types of cash-out refinancing options to consider. When you meet with a lender to begin the process, they will go through these options. However, it is beneficial to have a general idea of each before you get started. Conventional Loans: These private loans follow the guidelines set by Fannie Mae and Freddie Mac. With this option, your borrowing limit it set at 80% of your home value. A conventional loan is a good option for homeowners with high credit scores and a significant amount of home equity. FHA Loans: These are government-backed loans that also limit borrowing amounts to 80% of your home value. If your credit score is not high enough for a conventional loan, an FHA loan may be the better option. However, FHA loans require private mortgage insurance (PMI). VA Loans: Veterans of the armed forces can qualify for a VA loan, which can offer favorable rates and conditions. Unlike conventional and FHA loans, there is no limit to the amount of equity borrowers can cash out with a VA loan. Try Our Mortgage and Amortization Calculator Applying for Cash-Out Refinancing When you’re ready to pursue cash-out refinancing, you will need to partner with a mortgage broker or lender. They will explain the current interest rates, go through your financial history and goals and help you select the refinancing option that suits your needs. You’ll notice that the cash-out refinancing process is very similar to when you originally purchased your home. A home appraisal is required, and you will need to give your broker or lender the same financial documents that you provided when you applied for your existing mortgage. These documents include bank statements, tax returns, W-2s or 1099s and proof of alimony or child support payments. You’ll have the option of locking in your rate, which means you will be guaranteed the current rate when your loan closes — even if rates increase before your loan closes. Once a loan is in the underwriting phase, it’s fairly common for the underwriting team to reach out and request more information. When they have everything they need and your loan is approved, you will receive a completion notice and a date for your closing. During the closing process, you’ll sign all of the necessary paperwork and pay the final closing fees. The closing fees are usually between 2% to 5% of the price of your home. You can expect to receive your cash within three to five business days after your closing date. Is Cash-Out Refinancing Right for You? For Florida homeowners, cash-out refinancing can be a great option if you have a good amount of equity in your home. A “good amount” is definitely subjective; it will depend on your goals, the type of loan you get and your lender’s requirements. Cash-out refinancing is also beneficial for homeowners who may have received their existing mortgage at a high interest rate. Rates have hit historic lows, and if you can get a lower interest rate you can save money in the long run. However, cash-out refinancing may not be right for everyone. If you don’t have a sufficient amount of equity in your home yet, the cash-out refinancing process will not be worthwhile. It’s also not recommended if you have only owned your home for less than a year or if you are planning on moving in the near future. If your goal is to use the cash to pay off debts, you should have a long-term financial plan in place. It’s advantageous to consolidate debt and gain financial stability, but it can be all too easy to fall back into bad spending habits that lead to even more debt. Other Refinancing & Loan Options Cash-out refinancing isn’t your only option. Here are a few other loans worth considering: Home Equity Loan: Home equity loans are quite common. It’s essentially a second mortgage that you repay on a monthly basis at a fixed interest rate. Learn more: The Difference Between a Cash-Out Refinance and a Home Equity Loan. Home Equity Line of Credit (HELOC): This is a loan option that is similar to a credit card. You have a revolving line of credit that you can borrow from when necessary. HELOCs operate on adjustable interest rates. Personal Loan: If you would prefer a loan that is unrelated to your mortgage, a personal loan can usually offer a lower interest rate than credit cards. Rate-and-Term Refinance: With this option, you extend the terms of your mortgage at a lower interest rate. For example, going from a 15-year mortgage to a 30-year mortgage. Reverse Mortgage: Available to homeowners over the age of 62, a reverse mortgage also lets you convert your equity into cash. Your lender sends you monthly payments that you are not required to pay back until you sell or leave your home. Cash-Out Refinancing Recap We’ve covered a lot of information about cash-out refinancing. Here’s a quick recap: You Can Use the Money However You Want: You can renovate your home, pay off debt, add money to your retirement account or use the cash any other way you need. The Amount You Can Cash Out is Limited: You can only receive 100% of your home value if you have a VA loan. FHA loans and conventional loans cap the cash-out amount at 80% of your home value. There Will Be Closing Costs: You will be required to pay between 2% to 5% of the price of your home in closing costs. An Appraisal is Required: Your lenders will need a recent, accurate assessment of the value of your home before beginning the refinancing process. Your Loan Terms May Change: With your new mortgage, you will likely have a new interest rate and monthly payment. The length of your terms could also change. It Will Take a Few Days to Receive the Cash: It won’t take too long, though. Borrowers typically have the cash in hand three to five business days after closing. Ready to Take the Next Step? At Blue Water Mortgage, we know that every home and every homeowner is unique. While cash-out refinancing is a no-brainer for some, it is not always the right option. And that’s OK! Our team is here to help you find the perfect option. Through a transparent approach, we will assess your current financial status, get an understanding of your goals and identify the right refinancing option for your needs. We have close relationships with mortgage lenders, which enables us to shop around and find you the most competitive rates. We’re also locally owned and operated, and our clients are encouraged to call us 24/7. The first step is an initial conversation. Contact us here to speak with one of our mortgage specialists today! Roger Odoardi Roger is an owner and licensed Loan Officer at the Blue Water Mortgage office in Hampton, NH. Roger graduated from the University of New Hampshire Whittemore School of Business and has been in the mortgage industry for over 15 years. Roger has originated over 1500 residential loans and is licensed in New Hampshire, Massachusetts, Maine, Connecticut and Florida.